The present value model of the current account has been very popular, as it provides an optimal benchmark to which actual current account series have often been compared. We show why persistence in observed current account data makes the estimated optimal series very sensitive to small-sample estimation error, making it almost impossible to determine whether the consumption-smoothing current account tracks the actual current account closely, or not closely at all. Moreover, the standard Wald test of the model will falsely accept or reject the model with substantial probability. Monte Carlo simulations and estimations using annual and quarterly data from five OECD countries strongly support our predictions. In particular, we conclude that two important consensus results in the literature - that the optimal series is highly correlated with the actual series, but substantially less volatile - are not statistically robust.

en_US

dc.language.iso

eng

en_US

dc.publisher

Kiel Institute for the World Economy (IfW) Kiel

en_US

dc.subject.jel

C11

en_US

dc.subject.jel

C52

en_US

dc.subject.jel

F32

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dc.subject.jel

F41

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dc.subject.ddc

330

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dc.subject.keyword

Currrent account

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dc.subject.keyword

present value model

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dc.subject.keyword

model evaluation

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dc.subject.stw

Leistungsbilanz

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dc.subject.stw

Zeitreihenanalyse

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dc.subject.stw

Zeitpräferenz

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dc.subject.stw

Dynamische Investitionsrechnung

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dc.subject.stw

Theorie

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dc.subject.stw

OECD-Staaten

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dc.title

Should We Trust the Empirical Evidence from Present Value Models of the Current Account?